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The Forecast Is Sunny South of the Border : Trade: Latin America, more than Central Europe, offers an investment climate that can withstand economic shocks.

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<i> Carol Wise is a research associate with the Inter-American Dialogue in Washington and a visiting professor in the political science department at UCLA. </i>

When the forces of political and economic liberalization were unleashed in Eastern Europe last year, the international financial community quickly turned cool to Latin America. Yet it is Latin America that is now showing itself to be better positioned to shoulder the tough challenges immediately ahead of both regions: a huge debt overhang, a new round of energy price shocks and the consolidation of the 12 countries of the European Community into a powerful common market in 1992.

Both Latin America and Eastern Europe are straining to service a large external debt. Neither has been able to obtain the necessary levels of new financing or to secure significant reductions in interest or principal. Yet, during this time of fierce international competition for capital and relatively few breaks from the commercial banks or official lenders, Latin America is coming out ahead. Bob McCormack, head of Citicorp’s country debt review committee, explains that bankers are leaning toward “known quantities, like a Mexico, a Venezuela or a Brazil rather than sink themselves very deeply into a region whose future economic outlook could remain uncertain for a good part of the next decade.” The statement shows just how fickle the international financial community can be--a lesson that the Eastern European countries are learning the hard way.

On the energy question, the volatility of the price of intermediate crude oil could be disastrous for both regions, but probably more so for Eastern Europe. The price disruptions have hit at a time when Poland and Hungary, like Brazil and Argentina, are buckling down to complete stringent economic stabilization programs, while the East Europeans are also trying to make a difficult full-scale transition to market capitalism. At the same time, the East Europeans are being called on to devise a set of remedies for “stagflation,” the combined effect of rapid inflation and immediate recession. This problem, familiar to Western officials from previous oil price shocks, is one that the East, long buffered by state controls, has had little practice in solving. The East’s energy plight is compounded by its oil dependence on the Soviet Union, which has begun charging its former satellites world prices in hard currency for petroleum imports.

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Latin America’s track record in managing oil price hikes has been far from exemplary. It was, of course, the reckless borrowing of recycled petrodollars in the 1970s that landed the region in its present debt quagmire. Yet Latin America does not have to start from scratch in designing the financial institutions and policy tools for managing the crises commonly related to energy price shocks. It also has indigenous oil supplies and alternative fuel resources to fall back on in the event of a long-term supply crunch. In view of the harsh economic impacts felt the world over from the two major oil supply disruptions of the 1970s, it would not be an exaggeration to suggest that the latest shocks could set Eastern Europe’s market reform effort back several years.

Finally, for all the economic synergy surrounding “EC 1992,” Eastern Europe has not had much luck getting in on the action. Despite the signing of a joint declaration that normalized relations between Eastern and Western Europe in 1988, Eastern Europe’s trade with the EC stands exactly where it did in 1958, at just 2.9% of Western Europe’s trade balance.

Moreover, Eastern European exporters are still six times more likely to be hassled by EC “anti-dumping” measures than producers from elsewhere. The improvement of East-West trade ties will be hampered by the comparatively poor quality of most Eastern products, and because of tensions related to shared export structures between the East and new EC members like Portugal and Spain.

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Latin America, though braced for the worst, has done slightly better with the EC. Though its highly protectionist barriers on agriculture and other consumer products show no signs of loosening soon, the EC still purchased 21% of Latin America’s exports in 1988.

Some of the region’s more sophisticated firms have begun to operate directly within the EC, an option that would probably be unthinkable for firms from the East. This is so with producers of Argentine foodstuffs and several Brazilian paper-industry companies, all of which have moved into production niches left empty by investors who could no longer hold costs down within the EC’s hyper-competitive environment.

As West European transnational companies become stronger under the thrust of EC 1992 and seek to expand their production networks into low-cost foreign locations, Latin America is frequently mentioned as a preferred candidate for subsidiary component supply operations. Mexico and Brazil are already successful in that role, producing for U.S. transnationals in such sectors as motor vehicles, computers and pharmaceuticals.

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Again, until a convincing set of price signals and investment norms is in place, Eastern Europe will not make this short list.

A year ago, the development debate was leaning in favor of a debt bailout for Latin America, while Eastern Europe was hailed as virgin territory for private initiative and capital. Now the tables have turned: Although both regions still need a break on debt, Eastern Europe is clearly going to need a bigger break from public and private lenders and its immediate neighbors in Western Europe.

Latin America needs encouragement, mostly through U.S. trade and investment incentives, to barrel ahead with the economic reforms that most states in the region are perfectly capable of making.

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